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Transcript
5/7 Warm Up What monetary policy tools can the Fed use to slow down rapid economic growth? Answers The Fed can slow down economic growth by decreasing the money supply 1. Increase reserve requirements 2. Raise discount rate for borrowing reserves 3. Sell government securities in the open market Objectives • To identify the tools of fiscal & monetary policy • To explain how economic stabilization tools affect the money supply, interest rates, & aggregate demand • To analyze economic data to determine how fiscal & monetary policy should be used to correct economic problems Changing the Money Supply The Fed & Monetary Policy Monetary Policy Tools • Changing reserve requirements –Fed regulation that banks must keep % of deposits as cash in their own vaults or in Federal Reserve Bank Monetary Policy Tools • Changing discount rate –Interest rate Fed charges on loans to banks • How do consumers respond to high interest rates? –Spend less & save more Monetary Policy Tools • Open market operations – Buying & selling of U.S. securities by the Fed – “open” b/c anyone can buy securities – When bank buys securities from the Treasury, purchase amount is deducted from the bank’s reserves • Result is the bank will have less $ to lend out Economic Problem Solving Advising the Fed Changing the Money Supply Congress, the President & Fiscal Policy Fiscal Policy • Federal government’s use of taxation & spending policies to stabilize the economy The Great Depression When the stock market crashed, Herbert Hoover was the president. Economists at this time believed that if left alone, the economy would correct itself – laissez faire approach. In 1936 the economist John Maynard Keynes introduced a new theory. Keynesian School of Econ According to Keynes, what should the gov’t do to taxes & gov’t spending during a time of recession? During a period of rapid inflation? Recession • Reduce taxes & increase gov’t spending • What effect will this have on the money supply? Rapid Inflation Increase taxes and reduce government spending The Great Depression In what ways did FDR implement Keynesian approach to economic recovery? 2001 Recession Questions 1. What are two reasons Pres. Bush gives to justify his tax relief program? 2. Why did Pres. Bush discourage a tax increase? 3. Why would the FED lower open market security rates after 9/11? Summary Which policy seems more effective in regulating the economy—fiscal or monetary?